Risk aversion in maintenance : overmaintenance and the principal-agent problem

Baker, RD

Abstract

The concept of a risk-averse maintenance policy is introduced, and two approaches to modelling it are discussed, the first being via utility functions, and the second via inflation of the costs of unscheduled failures. After introducing a general methodology, several examples of its application are given. Principal-agent theory is then applied to the case of a maintenance engineer (the agent) who overmaintains equipment due to excessive risk aversion. Incentives based on the total cost of maintenance and failures can reduce overmaintenance, and it may be optimal for management to pay such an incentive. The problem is illustrated with an example of block maintenance. Suggestions for further work in this field are made.

Keywords: utility function; overmaintenance; block maintenance; age-based replacement; principal-agent problem; incentives

Citation

Baker, R. (2005). Risk aversion in maintenance : overmaintenance and the principal-agent problem. IMA Journal of Management Mathematics, 17(2), 99-113. https://doi.org/10.1093/imaman/dpi028

• Journal Article Type: Article
• Publication Date: Jul 1, 2005
• Deposit Date: Aug 21, 2007
• Journal: IMA Journal of Management Mathematics
• Print ISSN: 1471-678X
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 17
• Issue: 2
• Pages: 99-113
• DOI: https://doi.org/10.1093/imaman/dpi028